USD/JPY inter-market: set for a rebound to 107.60?

Extending its weakness for third consecutive day and hitting 5-week lows during European session, the USD/JPY pair is now seems to have found a balance area around 106.50 region. Last week's terrible NFP print continues to weigh on the US Dollar. Adding to it, global risk aversion, as depicted by rise in the Volatility index (VIX), boosted safe-haven appeal of the Japanese currency and is exerting additional pressure on the major. Meanwhile, the latest leg of decline since Tuesday has been accompanied by a sharp slide in the US and Japanese 10-year bond yields, further supporting the presumption of risk-off sentiment as investors appeared to be seeking the relative safety of bonds. However, decreasing yield spread between the US and Japanese 10-year bonds could be the only intrinsic restricting further downslide for the pair. Historically, decrease in the yield spread, preceded by a steady rise in the Volatility index, has led to a swift recovery for the pair.However, with both the US Federal Reserve and the Bank of Japan scheduled to announce their monetary policy decisions in the upcoming week, a slight improvement in the risk sentiment, coupled with an up-tick in US treasury yields, could trigger a near-term short-covering bounce towards 107.60 level.

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